Working With The Tax Law 2-3
CHAPTER 2
WORKING WITH THE TAX LAW
SOLUTIONS TO PROBLEM MATERIALS
Status: Q/P
Question/ Present in Prior
Problem Topic Edition Edition
1 Code Unchanged 1
2 Treaties Unchanged 2
3 Code New
4 Regulations, revenue rulings, revenue procedures, Unchanged 4
letter rulings
5 Authority Unchanged 5
6 Regulations Unchanged 6
7 Citations Modified 7
8 Small Cases Division Unchanged 8
9 U.S. District Court Modified 9
10 Judicial alternatives: trial courts Unchanged 10
11 Judicial system Unchanged 11
12 Tax Court and appeal process Modified 12
13 Trial Courts Unchanged 13
14 Circuit Court of Appeals New
15 Supreme Court Unchanged 15
16 Court decision validity Unchanged 16
17 Tax Court Regular and Memorandum decisions Unchanged 17
18 Citations Unchanged 18
19 Abbreviations Unchanged 19
20 Commerce Clearing House Unchanged 20
21 Court of Federal Claims Unchanged 21
22 Cumulative Bulletin Unchanged 22
23 Citations Unchanged 23
24 Issue recognition Unchanged 24
25 Judicial system Unchanged 25
26 Judicial system Unchanged 26
27 Citations Unchanged 27
2-1
Status: Q/P
Question/ Present in Prior
Problem Topic Edition Edition
28 Tax sources Modified 28
29 Ethics problems Unchanged 29
30 Ethics problems Unchanged 30
31 Internet New
32 Uncertainty produced by court decisions Unchanged 32
33 Code citations Unchanged 33
Bridge Discipline
Problem
1 Sources of federal tax law Unchanged 1
Research
Problem
1 Code Unchanged 1
2 Citations Unchanged 2
3 Citations Unchanged 3
4 Citations Unchanged 4
5 Citations Unchanged 5
6 Reliability Unchanged 6
7 Terminology New
8 Locating Federal Register New
9 Internet activity Unchanged 9
10 Internet activity Unchanged 10
11 Internet activity Unchanged 11
PROBLEM MATERIAL
1. With some exceptions, much of the 1939 Code was incorporated into the 1954 Code and the 1954 Code into the 1986 Code. This point is important when one assesses judicial decisions that interpret provisions of the 1939 and 1954 Codes. If the same provision was included in the Internal Revenue Code of 1986 and has not been subsequently amended, the decision is likely to have continuing validity. p. 2-3
2. Smith, Raabe, and Maloney, CPAs
5191 Natorp Boulevard
Mason, OH 45040
March 22, 2002
Mrs. Barbara Brown
Mallard, Inc.
100 International Drive
Tampa, Florida 33620
Dear Mrs. Brown:
This letter is in response to your request about information concerning a conflict between a U.S. treaty with the Ukraine and a Section of the Internal Revenue Code. The major reason for treaties between the U.S. and certain foreign countries is to eliminate double taxation and to render mutual assistance in tax enforcement.
Section 7852(d) provides that if a U.S. treaty is in conflict with a provision in the Code, neither will take general precedence. Rather, the more recent of the two will have precedence. In your case, the Ukrainian treaty takes precedence over the Code section.
A taxpayer must disclose on the tax return any positions where a treaty overrides a tax law. There is a $1,000 penalty per failure to disclose for individuals and a $10,000 penalty per failure for corporations.
Should you need more information, feel free to contact me.
Sincerely,
Alice Hanks, CPA
Tax Partner
p. 2-7
3. When the 1954 Code was drafted, the omission of some Code Section numbers was intentional. This omission provided flexibility to incorporate later changes into the Code without disrupting its organization. This technique is retained in the 1986 Code. pp. 2-2 and 2-3
4. a. Treasury Regulations are issued by the U.S. Treasury Department, while Revenue Rulings are issued by the National Office of the IRS. Both Regulations and Revenue Rulings are designed to provide an interpretation of the tax law. However, Rulings do not have the same legal force and effect as do Regulations. Usually, Rulings deal with more restricted problems. Rulings "are published to provide precedents to be used in the disposition of other cases and may be cited and relied upon for that purpose." See Rev. Proc. 86-15, 1986-1 CB 544. pp. 2-7 to 2-10
b. Revenue Procedures are issued in the same manner as are Revenue Rulings, but Procedures deal with the internal management practices and requirements of the IRS. Familiarity with these Procedures can increase taxpayer compliance and assist the efficient administration of the tax law by the IRS. p. 2-9
c. Letter rulings are issued upon a taxpayer's request. They describe how the IRS will treat a proposed transaction. Unlike Revenue Rulings, letter rulings apply only to the taxpayer who applies for and obtains the ruling, and generally, "may not be used or cited as precedent." [§ 6110(j)(3)]. Letter rulings used to be "private" (i.e., the content of the ruling was made available only to the taxpayer that requested the ruling). However, Federal legislation and the courts have forced the IRS to modify its position on the confidentiality of letter rulings. Such rulings now are published by a number of commercial tax services. p. 2-10
d. Like letter rulings, determination letters are issued at the request of taxpayers. They provide guidance concerning the application of the tax law. They differ from letter rulings in that the issuing source is the taxpayer's own District Director rather than the National Office of the IRS. In addition, determination letters usually involve completed (as opposed to proposed) transactions. Determination letters are not published, but are made known only to the party making the request. pp. 2-10 and 2-11
5. The items would probably be ranked as follows (from highest to lowest):
(1) Internal Revenue Code.
(2) Legislative Regulation.
(3) Interpretive Regulation.
(4) Revenue Ruling.
(5) Proposed Regulation (most courts ignore Proposed Regs.).
(6) Letter ruling (valid only to the taxpayer to whom issued).
pp. 2-7 to 2-11, 2-25, and Exhibit 2-1
6. Since Regulations interpret the Code, they are arranged in the same sequence as the Code. Regulations are prefixed by a number that designates the type of tax or administrative, procedural, or definitional matter to which they relate. These Regulations would be cited as follows with subparts added for further identification.
a. Reg. § 1.61.
b. Prop. Reg. § 1.385.
c. Temp. Reg. § 1.163.
pp. 2-7 to 2-9
7. a. Revenue Ruling number 503, appearing on page 11 of Volume 2 of the Cumulative Bulletin in 1974. p. 2-10
b. Revenue Procedure number 59, appearing on page 764 of Volume 2 of the Cumulative Bulletin in 1987. p. 2-10
c. Letter Ruling number 36 issued during the 46th week in 1990. p. 2-11
8. a. No. There is no appeal from the Small Cases Division.
b. No. Deficiency cannot exceed $50,000.
c. Yes.
d. No. Decisions are not published.
e. Yes.
f. Yes.
p. 2-12
9. The major advantage of a U.S. District Court is the availability of a trial by jury. One disadvantage of a U.S. District Court is that the tentative tax deficiency first must be paid before the Court will hear and decide the controversy. In the U.S. Tax Court, the tax need not be paid prior to litigating the controversy (although interest will be due on an unpaid deficiency). pp. 2-12 and 2-13
10. Smith, Raabe, and Maloney, CPAs
5191 Natorp Boulevard
Mason, OH 45040
July 14, 2002
Mr. Carl Jensen
200 Mesa Drive
Tucson, AZ 85714
Dear Mr. Johnson:
You have three alternatives should you decide to pursue your $274,000 deficiency in the court system. One alternative is the U.S. Tax Court, the most popular forum. Some people believe that the Tax Court judges have more expertise in tax matters. The main advantage is that the U.S. Tax Court is the only trial court where the tax need not be paid prior to litigating the controversy. However, interest will be due on an unpaid deficiency. The interest rate varies from one quarter to the next as announced by the IRS.
One disadvantage of the U.S. Tax Court is the possible delay that might result before a case is decided. The length of delay depends on the Court calendar, which includes a schedule of locations where cases will be tried. Another disadvantage is being unable to have the case heard before a jury.
The major advantage of another alternative, the U.S. District Court, is the availability of a trial by jury. One disadvantage of a U.S. District Court is that the tentative tax deficiency first must be paid before the Court will hear and decide the controversy.
The Court of Federal Claims, the third alternative, is a trial court that usually meets in Washington, D.C. It has jurisdiction for any claim against the United States that is based on the Constitution, any Act of Congress, or any regulation of an executive department. The main advantage of the U.S. Court of Federal Claims occurs when a taxpayer's applicable Circuit Court previously has rendered an adverse decision. Such a taxpayer may select the Court of Federal Claims, since any appeal instead will be to the Federal Circuit. One disadvantage of the Court of Federal Claims is that the tentative deficiency first must be paid before the Court will hear and decide the controversy.
I hope this information is helpful, and should you need more help, please contact me.
Sincerely,
Agnes Reynolds, CPA
Tax Partner
pp. 2-12, 2-13, and Figure 2-3
11. See Figure 2-3 and the related discussion.
a. There is no appeal by either the taxpayer or the IRS from a decision of the Small Cases Division of the U.S. Tax Court. p. 2-12
b. The first appeal would be to the Sixth Court of Appeals. Further appeal would be to the U.S. Supreme Court. pp. 2-13, 2-14, and Figure 2-4
c. Same as b. above. p. 2-13 and Figure 2-4
d. The appeal would be to the Federal Circuit and then to the U.S. Supreme Court. p. 2-13
12. There could be numerous reasons why the IRS may decide not to appeal a case that it loses in the U.S. Tax Court. The failure to appeal, therefore, does not necessarily mean that the IRS agrees with any result that was reached therein. p. 2-15
13. U.S. U.S. U.S. Court
Tax District of Federal
Court Court Claims
a. Number of regular judges 19 1 16
b. Jury trial No Yes No
c. Prepayment of deficiency required before trial No Yes Yes
Concept Summary 2-1
14. A U.S. District Court decision from Alaska (choice a.) may be appealed to the Ninth Circuit Court of Appeals. Other states in the jurisdiction of the Ninth Circuit Court of Appeals are Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington. p. 2-14 and Figure 2-4
15. The U.S. Supreme Court decides whether to hear any case, tax or otherwise, by requiring an affirmative vote of at least four judges. The Court accepts jurisdiction by granting a writ (i.e., certiorari granted) or denies jurisdiction (i.e., certiorari denied). The Supreme Court rarely hears tax cases. The Court may grant certiorari, however, to resolve a conflict among the Courts of Appeals or where the tax issue is extremely important. p. 2-15
16. a. If the taxpayer chooses a U.S. District Court as the trial court for litigation, the U.S. District Court of Illinois would be the forum to hear the case. Unless the prior decision has been reversed on appeal, one would expect the same court to follow its earlier holding. pp. 2-13 and 2-24
b. If the taxpayer chooses the U.S. Court of Federal Claims as the trial court for litigation, the decision that previously was rendered by this Court should have a direct bearing on the outcome. If the taxpayer selects a different trial court (i.e., the appropriate U.S. District Court or the U.S. Tax Court), the decision that was rendered by the U.S. Court of Federal Claims would be persuasive, but not controlling. It is, of course, assumed that the result that was reached by the U.S. Court of Federal Claims was not reversed on appeal. pp. 2-13 and 2-25
c. The decision of a U.S. Court of Appeals will carry more weight than will one that was rendered by a trial court. Since the taxpayer lives in Illinois, however, any appeal from a U.S. District Court or the U.S. Tax Court would go to the Seventh Court of Appeals (see Figure 2-4). Although the Seventh Court of Appeals might be influenced by what the Second Court of Appeals has decided, it is not compelled to follow such holding. pp. 2-13, 2-14, 2-24, and Figure 2-4
d. In that the U.S. Supreme Court is the highest appellate court, one can place complete reliance upon its decisions. Nevertheless, one should investigate any decision to see whether the Code has been modified with respect to the result that was reached. There also exists the rare possibility that the Court may have changed its position in a later decision. pp. 2-15, 2-24, and Figure 2-3
e. When the IRS acquiesces to a decision of the U.S. Tax Court, it agrees with the result that was reached. As long as such acquiescence remains in effect, taxpayers can be assured that this represents the position of the IRS on the issue that was involved. Keep in mind, however, that the IRS can change its mind and can, at any time, withdraw the acquiescence and substitute a nonacquiescence. p. 2-17
f. The issuance of a nonacquiescence usually reflects that the IRS does not agree with the result that was reached by the U.S. Tax Court. Consequently, taxpayers are placed on notice that the IRS will continue to challenge the issue that was involved. p. 2-17